Finance; Reasons to be beer-full

08 August 2008 By db staff writer

d=”standfirst”>With a strong euro and a weak pound, combined with higher costs for raw materials and labour, the UK drinks industry is certainly under pressure. But is the situation really as bad as the doomsters say?

While the Bank of England cut interest rates by a quarter of a percentage point in April, the European Central Bank was more sanguine and left its rates unchanged. As a result, sterling continued to slide against the single European currency.
While the government continues to believe that the UK is better placed than most to ride out the slowdown, the markets are less convinced. Since last summer sterling has lost 15% of its value against the euro as well as nose-diving by similar amounts against the Australian and New Zealand dollars. That affects about three quarters of the UK’s wine imports and the producers will be looking to recoup as much as they can to protect their margins. Add inflationary increases to raw materials, labour, transport and other services, and the cost increases could exceed 20% in less than a year even before the budget duty rises are taken into account.
UK importers are unable to pass on such significant increases. What they want, therefore, is for sterling to increase in value, especially against the very strong euro.
The single European currency is at its strongest ever level against the dollar for two reasons. First, the European economies appear much more resilient than America’s; second, that very weakness means that governments, notably in the Middle East and Asia, are gradually switching their reserves into the euro and out of the ailing greenback. It is a self-perpetuating circle.
For the euro to weaken meaningfully the dollar must go up.
The Bank of England and the European Central Bank are both charged with curbing inflation, but the US central bank’s brief is to keep the economy going by pumping money into the system. If that means letting inflation rip, then so be it. The probability is that the dollar will fall even further as the US slides into recession. That makes the likelihood of President Bush demanding an increase in US rates to bolster the greenback about as likely as San Marino becoming a nuclear power. So the euro will remain strong. Importers of European wines will have to survive as best they can.

Bread, baccy and beer?
In a market slump, put your money in bread, baccy and beer. For decades that was the advice to investors. Go for bread (basic foods) because people must eat, tobacco because smoking is an addictive and ingrained habit, and beer because the working man’s pint is culturally (and politically) sacrosanct.
Yet today smokers are pariahs; producers of basic foods are suffering ever-eroded margins at the hands of supermarkets; and the beer market is in long-term decline with the British Beer and Pubs Association reckoning that sales are 14 million pints a day below their 1979 peak.
By mid January the FSTE 350 Index Beverages sector had slumped by 17.3% from its 2007 high, while the overall London market, as measured by the FTSE All-Share Index (a more accurate indicator of trends than the much-quoted FTSE 100 Index), had fallen 17.7%. The beverages group has come off the bottom to recover about 13% of the value lost while the market as a whole has advanced by just over 12% from the trough.
But the Beverages Sector is not a good indicator of what is happening because it contains just four companies, Diageo, SABMiller, Britvic and Scottish & Newcastle, which will soon disappear from the stock market. What’s more, Diageo and SABMiller each derive only about 10% of their earnings from UK sales.
Pubs and brewers have suffered heavily in the stock market slump. Shares in Punch Taverns, Britain’s biggest pub group, are still more than 50% below last year’s high, while Marston’s and Greene King have also lost more than half their value. At one stage JD Wetherspoon’s shares had fallen by a massive 60%.
So beer was decidedly not a safe haven for investors’ funds. But should they consider moving into it now? Hardly a brewer or a pubco fails to describe the months ahead as “challenging”. But brokers, whose job it is to talk up shares, reckon the gloom might have been overdone. Retail spending has not fallen off a cliff (at least not yet), so leisure spending, although under extreme pressure, may not be suffering as much as the doomsters predict. Although the London stock market is still more than 12% down in the past year, there are signs that it is stabilising and beginning to recover, albeit weakly. Could the brewers too begin to pick up? Watch for directors purchasing their own shares as a tip that the worst may be over.  db © May 2008